I received a question today by email and I thought it would be useful to answer it here.
Hello, Phil. Regarding Form 8854, I’ve been trying (so far unsuccessfully) to get clarification on determining the net worth component for assets shared equally by spouses. Does each spouse include 100% or 50% of the value of the shared assets in the net worth calculation? Does the answer depend on the type of shared asset? We have the following shared assets: joint bank accounts, shares of stock held in a superannuation fund (a grantor trust where we are the only trustees), a house owned by us as joint tenants, and miscellaneous personal items such as furniture, etc.
By the way, I think you should author a new book: Renouncing U.S. Citizenship for Dummies :-)
Logging Out of Two Systems
For those of you who are going to give up U.S. citizenship (or cancel that permanent resident visa you have), there are two hoops to jump through:
- Log out of the U.S. citizenship database. There is a nice little bureaucratic dance you go through, complete with paperwork and interviews.
- Log out of the U.S. tax system. For this, we have Form 8854 from the IRS.
By filling in Form 8854, you will discover whether you are a “covered expatriate” or not. A “covered expatriate” owes tax to the United States, triggered by the cancellation of citizenship. Someone who is not a covered expatriate just has the IRS paperwork to deal with, but no tax to pay.
Form 8854 asks you to fill in a balance sheet and declare your worldwide assets and liabilities. If your net worth exceeds $2,000,000, you are a covered expatriate.
Answer the Question, Phil! (Theory)
See, I’m finally getting around to answering the question.
There is no such thing as a jointly-filed Form 8854. Each expatriating human being files his/her own Form 8854. So what do you do when preparing Form 8854 for one or both spouses of a married couple? Maybe one is expatriating and the other is keeping his/her U.S. citizenship. (We see this happen). Maybe both are expatriating.
How do you figure out the right numbers to put on the Form 8854 balance sheet?
The answer is that the spouses have property rights in their assets that are defined by local law. As a general principle the IRS respects the property rights of parties as those rights are defined by the relevant local law. The IRS only computes the tax consequences of transactions based on those legal rights.
The Easy Situation
So the first answer to this question is simple:
If you can prove with certainty what the husband owns and what the wife owns, under local law, then you have your answer.
For instance, a couple living in a community property jurisdiction (California being the example I know first-hand because, well, I live here and I’m married), by definition all assets acquired during marriage are going to be community property with equal ownership by the spouses, until proven otherwise. (Gross simplification. Do not use this sentence as legal or tax advice in the event of divorce, etc.)
Fixing Uncertainty or Customizing Reality
But what if you can’t prove with certainty exactly what belongs to the husband and what belongs to the wife? Again a simple answer. For this simple answer we turn to that noted tax scholar, Adam Savage:
Section 1041 of the Internal Revenue Code makes transfers between spouses completely tax-free. So, following Adam’s timeless legal advice, we reject the murky, uncertain reality of property rights of the spouses, and substitute a carefully-handcrafted reality in its place. Tax-free.
When one or both members of a married couple decide to expatriate, you’re probably pretty safe dividing the assets in half when preparing each person’s Form 8854.
If you are at all unclear about who owns what, or if it might be useful to have an unequal division of assets between the spouses (oh, hypothetically speaking, the expatriating spouse magically has $1.9 million net worth on his Form 8854 balance sheet while the U.S. citizen spouse retains the remainder of the assets as her separate property), then do a postnuptial agreement to create the reality you’d like to present to the Internal Revenue Service.
Thanks S for the question. I hope this helps.